A term structure model for dividends and interest rates. (16th June 2020)

• Record Type: Journal Article
• Authors: Filipović, Damir; Willems, Sander
• Is Part Of: Mathematical finance. Volume 30:Number 4(2020)
• Page Start: 1461
• Page End: 1496
• Publication Date: 2020-06-16
• Subjects: dividend derivatives -- interest rates -- moment‐based option pricing -- polynomial jump‐diffusion -- term structure; Business mathematics -- Periodicals; 332
• DOI: 10.1111/mafi.12279
• Languages: English
• ISSNs: 0960-1627

Abstract

Abstract: Over the last decade, dividends have become a standalone asset class instead of a mere side product of an equity investment. We introduce a framework based on polynomial jump‐diffusions to jointly price the term structures of dividends and interest rates. Prices for dividend futures, bonds, and the dividend paying stock are given in closed form. We present an efficient moment based approximation method for option pricing. In a calibration exercise we show that a parsimonious model specification has a good fit with Euribor interest rate swaps and swaptions, Euro Stoxx 50 Index dividend futures and dividend options, and Euro Stoxx 50 Index options.